Campbell acknowledges the financial support of the National Science Foundation, and Viceira the financial support of the Division of Research of the Harvard Business School. We are grateful for helpful comments and suggestions by Ludger Hentschel, Anthony Lynch, an anonymous referee, and seminar participants at Harvard, the 1999 Intertemporal Asset Pricing Conference hosted by the Centre Interuniversitaire de Recherche en Analyse des Organizations (CIRANO) of Montreal and the 2000 WFA Meetings. Josh White provided invaluable research assistance. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research.
This paper examines how risky labor income and retirement affect optimal portfolio choice. With idiosyncratic labor income risk, the optimal allocation to stocks is unambiguously larger for employed investors than for retired investors, consistent with the typical recommendations of investment advisors. Increasing idiosyncratic labor income risk raises investors' willingness to save and reduces their stock portfolio allocation towards the level of retired investors. Positive correlation between labor income and stock returns has a further negative effect and can actually reduce stockholdings below the level of retired investors.
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